Statement by Valeriano F. Garcia at the meeting of November 18, 1999

lntemational Bank for Reconstruction and Development International Development Association 87498 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-323 November 17, 1999 04:29:52 PM Statement by Valeriano F. Garcia Date ofMeeting: November 18, 1999 Colombia: CAS Progress Report We welcome Colombia's accurate CAS Progress Report and its basic objectives: poverty reduction, social development and sustainable growth. In this regard the adjustment operations to fight against economic recession, financialinstabilityand internal conflict are encouraging. However, the situation presents some points of concern, such as economic growth, fiscal downturn, financial sector problems, the social impact of adjustment and internal conflicts. Because we are broadly in line with the CAS Progress Report, we are presenting some comments for emphasis on the points underlined before. The macroeconomic performance has deteriorated sharply, includingGDP growth, the inflation rate, the fiscal balance, the poverty indicators and the external accounts. The continuous decline ofGDP since 1996 reached 0.6 percent in 1998 and is forecasted at -4.5 percent this year. This is the lowest annual growth rate since 1931. The production has dragged down due to problems related to structural and short-term difficulties. In particular, the financialand construction sectors have experienced the most serious deterioration. By contrast, the mining, petroleum, coffee and telecommunications sectors have grown. At this point, it is important to remark the adverse effect of the lack of safety and the uncertain environment created by internal conflict, with serious implications on several economic sectors, which have strangled the public and private activities in Colombia. The fiscal deficit is projected to continue deteriorating, from -3.7 percent in 1998, to - 6.2 percent in 1999. In order to confront this situation, the government has been taking actions to reduce and stabilize this macroeconomic target, which will be difficult but not impossible. To help the fiscal front, the government is completing stabilization measures in several areas of public finance. First, it is submitting to Congress a bill that would broaden the tax base by eliminating current exemptions and tax breaks, as well as reducingincometax from 35 to 32 percent. Second, a bill to force regional governments to lay aside money to cover pension fund obligations. Third, a bill to cut and control spending of municipal and regional governments, reducing the need for ;nus document has a restricted distribution and may be used by recipients only in the 1 :-':::rfonnmce of their official duties. Its contents may not otherwise be disclosed without ':,; ~'r!d Bmk authorization. central government bailouts. Fourth, a constitutional reform bill that will streamline central government transfers to various regions. Finally, the government will be increasing control for the efficiency of expenditure. We are pleased with these actions and encourage the government to continue in this trend of adjustment, civil education and modernization. For several years the Central Bank of Colombia has aimed at several targets, which frequently turned out to be contradictory. This resulted in a loss of monetary control, because the macroeconomics fundamentals became unsound and the Bank of Colombia did not have the necessary tools to improve the situation (more targets than instruments). We look forward to a faster release of these constraints, especially with the support of the IMF agreement and the WB adjustment loans, in order to reestablish fiscal consolidation, take actions to improve monetary policy instruments and enact better bank regulations. These conditions should provide more room for the Bank of Colombia to apply a market-oriented instrument, and carry out a tight monetary policy, which is precondition for inflation control and appropriate management of monetary and financial policies. In this regard, we encourage the authorities to enact and apply the necessary legal mechanisms introduced by the Basel recommendations on the supervision process; to strengthen the capacity of the Superintendence to deal with the complicated financial system and try to secure faster actions to clean up the financial sector. These accomplishments are fundamental to attain a more sound financial system and attract national savings, as a first step to promote a dynamic process of saving and investment. Increasing the investors' confidence and accomplishing macroeconomic goals are basic to revamp the economic growth trend. Economic growth is essential to improve the fiscal and external sector through the above-mentioned actions, as well as to generate more employment and eventually stimulate a renewed credit demand for genuine investment. On poverty and inequality aspects, as a result of the economic crisis the number of poor people has increased substantially in the cities and in rural areas, where poverty is more widespread and deeper. This has also resulted in an increase in unemployment, deferred health care, lower food consumption, lower school enrollment, and higher child labor. We are pleased with the Socia!. Protection Program and the Social Safety Nets, and we encourage the completion of their targets, along with strict supervision to avoid or reduce slippage. Nevertheless, to overcome these difficulties, economic consolidation is essential. In conclusion, we are in agreement with the Progress Review and the main objectives underlined in it. The approach goes parallel with our observations. First, it is important to reduce violence. Second, to promote a sustainable rate of growth. Third, to encourage rural development. Political support is essential to achieve these goals, in order to put on track actions to find a solution for Colombia's economic and social problems. Finally, we wish the best to the Colombian authorities in their laudable efforts, and congratulate Staff for their objective and clear document.